Vonex Limited Limited


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Investment Memo: Vonex Limited (ASX:VN8) - LIVE

Opened: 23-Feb-2022

Shares Held at Open: 3,273,162

What does VN8 do?

Vonex Limited (ASX:VN8) is an Australian telecommunications company providing innovative VoIP solutions, particularly to the Small and Medium Enterprise (SME) market segment.
VoIP stands for Voice over Internet Protocol - basically super clear and easy to manage phone calls over the Internet.
These calls are done via something called a PBX - PBX stands for Private Branch Exchange, which is a private telephone network used within a SME.
VN8 is employing an aggressive acquisition strategy to grow revenues at scale and claim market share more quickly than by organic growth alone.

What is the macro theme?

The importance of reliable and secure business interconnectivity has become even more prominent in a pandemic-impacted world, and so enterprises are placing greater priority on possessing and maintaining quality communication networks.

Additionally, the Australian telecommunications industry is especially prone to M&A activity.

Namely, bigger telco companies generally look to acquire smaller more nimble companies with expanding revenue and user bases in order to more quickly capture their growth, rather than do the hard yards of building and growing customer bases/ building new complementary divisions/ verticals.

Why did we invest in VN8?

‘Hunt for Growth’ aggressive acquisition strategy

We believe that VN8 is on track to become cashflow positive in the near-term whilst claiming market share on a national basis through its ‘Hunt for Growth’ aggressive acquisition strategy.

As such, we think that it won't be too long before dividends become a reality, providing regular returns, and attracting more institutional investor interest.

The other realistic possibility is that VN8 looms as a potential target for a larger telco.

Typically the larger the telco, the more appealing it is for acquisition, as a quick and cost-effective way to either gain new customers or integrate a new vertical into an existing business.

What do we expect VN8 to deliver in 2022?

Objective #1: Become cash-flow and EBIDTA positive in FY22.

Becoming cash-flow positive is an important precursor for companies to begin paying their own way, rather than raise capital for survival. VN8 is almost there, with back to back cash-flow positive half year periods, but we would want to see it deliver it for a full fiscal year, and continue to do so going forward.

As a core measure of profitability, becoming EBIDTA positive would signal to the market that VN8 can deliver sustainable growth and, we believe, make it a much more attractive target for a larger telco business. This is the precursor to considering dividend payments for a company.

Objective #2: Grow users through integrated acquisitions and cross-selling opportunities

Part of the acquisition strategy is to integrate the assets and customers into the Vonex channel partner network. We expect the user base to grow organically through cross-selling opportunities while driving down costs through improving economies of scale.

A key milestone that we want to see VN8 achieve is 100,000 PBX users, an indication that the acquisition strategy is leading to organic user growth.

What could go wrong?

Market risk

The market may not like VN8’s acquisitive strategy. Just because the acquisition should benefit VN8 in the long-run doesn’t mean the market will enjoy the short term pain to the VN8 cash balance and shareholder dilution. Acquisitive strategies in no way guarantee that a larger telco will look to acquire VN8 in the end, particularly if user growth slows.

Funding risk

VN8 may need to tap the market for more cash to aggressively grow its business through acquisitions. This goes hand in hand with market risk

Competition risk

VN8 is swimming in a pool of competitors that could push them out of the market or make their acquisitions more expensive. Alternatively, a much larger telco invests heavily in the infrastructure that VN8 provides its customers - especially in the SME market segment. VN8 has a relatively unique product offering and experienced representatives in their distribution channels, however larger entities may decide to move into their niche.

What is our investment plan?

We initially invested in VN8 in mid 2020 with a 24 month horizon to see how the acquisition strategy would play out. We increased our holding in mid 2021, as we liked how management were executing this strategy, and intend to hold the majority of our investment in the year ahead.

The long-term strategy is to watch VN8 grow through acquisition until it is taken out by a larger telco company at a bigger valuation than we initially invested.

Disclosure: The authors of this article and owners of Next Investors, S3 Consortium Pty Ltd, and associated entities, own 3,273,182 VN8 shares at the time of publication. S3 Consortium Pty Ltd has been engaged by VN8 to share our commentary and opinion on the progress of our investment in VN8 over time.

Investment Milestones for VN8

Initial Investment @ 14c
Top Slice
🔲 Free Carry
Increase Investment @ 11c
🔲 Free Carry
🔲 Take Profit
🔲 Price increases 300% from initial entry
🔲 Price increases 500% from initial entry
🔲 Price increases 1000% from initial entry
12 Month Capital Gain Discount
🔲 Hold remaining Position for next 2+ years

Our Past Commentary on Vonex Limited

Date Title
05-Oct-2022 $ VN8 grows to $51M Annual Recurring Revenue with Latest Acquisition
08-Aug-2022 $ 0.091 Why do small-caps take so long to execute?
04-Aug-2022 $ VN8 following the telco playbook for growth
05-Mar-2022 $ 0.095 Mainstream Media Catching on to the Commodities Supercycle
05-Feb-2022 $ 0.110 The "Lesser Kown" Energy Transition Metals: Copper, Aluminium, Graphite, Helium, Rare Earths
18-Dec-2021 $ 0.115 Investing 101: Taking Stock of your Stocks and Diversification
15-Dec-2021 $ New Acquisition for VN8 as “Hunt for Growth” Strategy Continues
27-Nov-2021 $ 0.120 New COVID strain, Santa Rally, Market Thoughts
22-Nov-2021 $ VN8’s “Hunt for Growth” Strategy Now Delivering
30-Oct-2021 $ 0.145 The fallout from the VUL short attack explained
25-Sep-2021 $ 0.150 Managing a market crash - lessons from March 2020
21-Sep-2021 $ 0.120 Vonex Integrates $31M Direct Business into its Operations
02-Sep-2021 $ 0.130 The full year results are in, how did our telco investment VN8 fare?
21-Aug-2021 $ 0.135 Market fluctuations and portfolio news and quick takes
14-Aug-2021 $ 0.125 Bookmark it, a new Pick of the Year is coming next week
31-Jul-2021 $ 0.135 Quarterly Reporting Season and other news from our portfolio stocks
28-Jul-2021 $ 0.125 VN8 Quarterly: So close to being cash flow positive. Completes giant acquisition, cap raise. We topped up.
24-Jul-2021 $ 0.125 Why stocks go into "Quiet Execution Mode", how to spot a cap raise, stock "Confession Season"
12-Jun-2021 $ 0.160 What did our investments do this week? CPH, ONE, TMZ, 88E and more...
07-Jun-2021 $ 0.155 VN8 to consume its biggest ever acquisition
05-Jun-2021 $ 0.155 What did our investmensts do this week? BPM, VN8, IVZ, and more...
01-Jun-2021 $ 0.135 VN8 Acquiring Smaller Players, Becoming Snack for Major Telco
27-Apr-2021 $ 0.175 Our Portfolio Performance from January 1st to March 31st 2021
03-Feb-2021 $ 0.230 VN8’s Latest Acquisition Boosts Group ARR to Over $18M
07-Jan-2021 $ 0.225 Our Stock Picks for 2021
20-Nov-2020 $ 0.215 VN8 Moving up to the Next Tier of ASX Telcos
30-Oct-2020 $ 0.165 $31M ASX Small Cap Telco Posts $16.7M Annual Recurring
25-Sep-2020 $ 0.165 Meet Our Latest ASX Tech Portfolio Addition: VN8 is a Company Transformed

Investor Presentation

Full year results comment

ASX:VN8 Sep 01, 2022 Announcement

Investment Memo: VN8 IM-2022
Objective 1: Become cash-flow and EBIDTA positive in FY22.
Objective 2: Grow users through integrated acquisitions and cross-selling opportunities

Prior to market open today, our small cap telco investment Vonex (ASX:VN8) delivered its annual report, providing us a look at how the company fared over the past financial year.

As per our Investment memo, there were two key items we wanted to see VN8 deliver, as below:

Looking at the financial statements, we’re pleased to see VN8 deliver across both our objectives.

We think VN8’s aggressive growth via acquisition strategy is paying off, noting the vast improvements to its cashflow dynamics - there was a $5.6M increase in net cash from operating activities, compared to the previous financial year. Furthermore, annual recurring revenue was up 97% to now exceed $36M.

Underlying EBITDA was up 1000% to $6.6M compared to the previous financial year, benefiting from both organic growth and contributions from Nextel and MNF Direct Business acquisitions.

At the end of the financial year, VN8 held $3.2M in cash.

Next up, we are keen to see the complete integration of MNF Direct Business, which should further boost the company’s bottom line.

Greater financial flexibility following final MNF repayment

ASX:VN8 Aug 04, 2022 Announcement

Investment Memo: VN8 IM-2022

This morning, our small cap telco investment Vonex (ASX:VN8) reported that it has made the final monthly cash payment to Symbio Holdings Ltd (ASX: SYM) for its transformative $31M acquisition of the MyNetFone Direct Business (refer ASX announcement 7 June 2021).

As a result, VN8’s net cash flow will now improve to the tune of $833k per month, or about $10M annually.

VN8 is now completely unencumbered by deferred acquisition payments, providing greater financial flexibility moving forward. This will be useful for further acquisitions and growth opportunities, or accelerating repayment of the $16M debt facility (of which $14.5M has been drawn).

VN8 delivered a strong financial result in its latest quarterly report, posting record revenues, sales and customer growth. The results come on the back of the telco’s aggressive growth by acquisition strategy, which has also led to record Annual Recurring Revenues (a useful indicator for future ongoing revenue) topping $36M.

We have provided a deep dive into these financial results as well as what is in store for the company in our latest article VN8 following the telco playbook for growth.

Back to back record quarterly sales result

ASX:VN8 Jul 29, 2022 Announcement

Investment Memo: VN8 IM-2022

This morning, our small cap telco investment Vonex (ASX:VN8) produced another strong quarterly result, underlined by revenues increasing 81% year-on-year (YoY) to a new record $10.5M.

The previous record was delivered last quarter, with $10.2M in revenues, obviously a pleasing trend for shareholders.

The robust financial results provide an endorsement of the company’s aggressive acquisition strategy, namely: Voiteck (acquired January 2022), the Direct Business (August 2021), Nextel (February 2021) and 2SG (March 2020). These acquisitions have accelerated customer acquisition and expanded VN8’s national footprint, feeding into the increases in sales and revenue.

Another key metric we track is annual recurring revenue (ARR), which basically indicates the amount of revenue that a company expects to repeat. As at 30 June 2022, VN8 has an ARR of ~$36.2M, up 97% YoY.

With VN8 capped at ~$23M - well below its ARR - and cash at bank of $3.2M at the end of the quarter, we like the prospects for a positive market re-rate in the year ahead.

Also of significance during the quarter, VN8 entered a binding heads of agreement with Commonwealth Bank-backed telco provider, More to become its exclusive provider of Hosted PBX services to new and existing CBA customers.

VN8 will also deliver a new hosted PBX and IP telephony enablement platform for More's new and existing small to medium enterprise (SME) customers. We expect this to positively impact ARR through new license fees, hardware and call carriage.

The quarterly results bodes well for our key objectives we’d like to see VN8 achieve this year:

Following today’s results, we plan to provide a more detailed update on VN8 in early August.

Agreement with CBA’s strategic telecoms partner

ASX:VN8 Jun 10, 2022 Announcement


CORPORATE: Strategic partnership

This morning, our small cap telco investment Vonex (ASX:VN8) announced its partnership with More, the Commonwealth Bank (CBA) -backed telco provider, perhaps best known for its Tangerine broadband services.

Both parties have entered binding heads of agreement which will see VN8 become More’s exclusive provider of Hosted PBX services to new and existing CBA customers. VN8 will also deliver a new hosted PBX and IP telephony enablement platform for More's new and existing small to medium enterprise (SME) customers.

As we’ve mentioned previously in covering VN8, we like the company’s aggressive growth through acquisition strategy, which has fast-tracked improvements in several key metrics we track for VN8 (notably annual recurring revenues and PBX customers). The acquisition strategy has helped lead to today’s More partnership, as it is actually through VN8’s subsidiary, 2SG Wholesale - the first of VN8’s four acquisitions over the last 2 years.

Upon full release of the Platform and migration of existing Hosted PBX business services, VN8 expects a significant increase to annual recurring revenue from the More partnership, predominantly from license fees, hardware and call carriage. In addition, Vonex will charge a one-off fee for the initial software development and an ongoing monthly management fee for the platform.

Today’s news fits in with both the key objectives we’d like to see VN8 achieve this year, namely to become bottom-line positive and continue to grow its market share and national customer base.

We look forward to the upcoming quarterly and full year results, which will reveal how VN8 are tracking on these objectives.

VN8: Fruits of acquisitions leads to record quarterly result

ASX:VN8 Apr 29, 2022 Announcement

Our telco investment Vonex Communications (VN8) delivered a strong quarterly result highlighted by revenues growing 96% year-on-year (YoY) to a new record $10.2M.

In addition, the customer base grew by 129% YoY to over 100,000 active users, leading to annualised recurring revenues topping $35M as at 31 March 2022.

The strong financial results come on the back of VN8’s aggressive acquisition strategy. Over the past 2 years, VN8 has acquired 4 businesses, expanding their national footprint and accelerating customer growth in the process.

This quarterly result speaks to progress towards both Objectives we want to see VN8 deliver this year, with the expanding customer base feeding into the financial growth. In particular, the results augurs well for VN8 to deliver on our #1 Objective we want to see for 2022 - for VN8 to become both cashflow and EBITDA positive this financial year.

Next up, we want to see VN8 complete the integration of its biggest acquisition - MNF Direct - which should occur in the current quarter. Further details of our VN8 investment can be found within our Investment Memo.

Bigger fish eating smaller fish supports growth strategy

ASX:VN8 Mar 28, 2022

Our investment Vonex (ASX: VN8) has been aggressively growing its integrated telecommunications business through acquisitions, digesting four telcos over the past two years. This has led to the company posting record sales, PBX customers, and annual recurring revenue in its latest half yearly report.

This strategy is outlined in our second objective set for VN8 in our 2022 Investment Memo: “Grow users through integrated acquisitions and cross-selling opportunities”.

It is a similar blueprint to what fellow telco Uniti Wireless (ASX:UWL) has followed since its inception as a 25 cents per share IPO in 2019. Over the past two years, UWL acquired several smaller companies, including its $610 million takeover of OptiComm in late 2020. The strategy culminated last month with UWL receiving a takeover bid of $4.50 per share from NZ’s Morrison & Co, valuing the company at over $3 billion. Since then, Macquarie has also lobbed a takeover bid for UWL, demonstrating “the intense demand for telecommunications assets in a post-virus world”, as reported in today’s AFR.

As we wrote late last year, it’s a common thematic in the telecommunications industry for telcos to ultimately be acquired. Over 83% of ASX listed telcos with a market cap of between $15M to $500M have been acquired since 2010.

We like the growth trajectory of our VN8 investment, but want to see this translate into becoming both cashflow and EBITDA positive this financial year, as per our Investment Memo objectives:

Vonex half year results announced

ASX:VN8 Mar 01, 2022

Our telco investment Vonex is in the midst of an acquisition phase, having acquired four complementary businesses over the past 2 years. This has helped VN8 deliver a strong financial performance over the half-year ending 31 December 2021.

We liked that group revenue increased to $15m, up 54% year-on-year (YoY). Gross profit was also up significantly to $7.5m, up 174% YoY. Underlying EBITDA was up to $3.3m for the half year, versus $0.2m in H1 FY21.

The acquisitions have rapidly expanded VN8’s customer base, with PBX users now exceeding 90,000. This has led to a 104% growth in annual recurring revenue to $34.5M - which we think is quite sold for a company with a market capitalisation of ~ $32M.

The flip side to the acquisitions is that VN8 currently has a high level of net debt ($11.9M) - but given its strong cashflow, we expect most of the debt to be paid back this year. This will free up cash for further acquisitions and possible dividends down the track.

We’re keen to see VN8 continue to grow on several key financial and operating metrics in 2022, whilst fully integrating the most recent acquisitions into its business.